I argue that savings increase overall will increase the level of investment expenditure in an economy keeping all other factors constant. When people have more savings, or disposable income, they have the ability to investment more to increase the investment expenditure. However, the overall investment expenditure in an economy does not solely depend on savings because there are other influential factors such as interest rate, government expenditures and the overall global economic condition. First, the level of total investment expenditure will increase when savings increase. I argue this according to the classical growth theory. As the text book Chapter 23 of Parkin, Powell & Matthews (2012), page 521 explained, the classical growth theory argues that any drop in consumption, or increase in savings, is matched by a corresponding level of increase in investment. On the loanable funds market graph as indicated below, the market was at an equilibrium level when supply equals demand. However, now that savings has increased due to an expectation of negative market conditions in the future, the supply of loanable funds increased. The supply curve shifts from the black line to the red line on the right side. The new equilibrium indicated by the new supply curve and the original demand curve will have a higher quantity and a lower interest rate. A lower interest rate means that people gets lower interests with the same level of money put into a bank account. It also means that it is cheaper for people to borrow money and investment. So a decrease in interest rate will decrease savings and increase investment, keeping all other factors constant. However, in reality, I argue that there are many more factors that influence the overall level of investment and I will analyze more scenarios in the following paragraphs.Investment expenditure in the economy is not only dependent on the savings level, there are some other factors that influence the investment expenditure. One can only say that keeping all other factors constant, savings can potentially increase investment. This force that I will analyze in this paragraph decreases the public investment level even though the savings level in the society could be increasing. For example, government spending definitely has a great impact on the level of investment as well. According to Chapter 23 of Parkin, Powell & Matthews (2012), page 546, when the government is under a budget deficit, that is, when the government expenditures is greater than government tax revenue, real interest rate can rise and investment level can be decreased. This is called the crowding-out effect. When this happens, the government competes with the private sectors for a limited amount of financial capital. The higher interest rate can increase the savings level in this case because people will want to receive more interest by saving. However, in this case, when the crowding-out effect is also present, the investment level will decrease. Due to the savings level increase, investment expenditure will not decrease that much. That is, the decrease in investment expenditure will not be as high as the level of government deficit because savings has increased investment a little. From the graph, we can see that holding supply constant, government deficit increased the demand for loanable funds and shifted the demand curve to the right (from the black line to the red line). The result is an increased quantity in loanable funds and an increased level of interest rate. The pink region indicated the area of crowding-out. With the increased interested rate, the vertical line from the new interest rate and the old demand curve caused the quantity to be decreased. From this example, I argue that even though savings can increase investment, the overall investment expenditure level in an economy is not necessarily positively correlated with the savings level because there are other influential factors such as crowding-out.Crowding-out effect graphIn other instances, the increase in savings can have no effect on the level of investment level at all. This is suggested by the famous English economist David Ricardo and refined by Robert Barro. Their finding is called the Ricardo-Barro effect, according to Chapter 23 of Parkin, Powell & Matthews (2012), page 546. This effect relies on the fact that the tax payers are smart, rational, and understand some level of economics. When the tax payers are smart, they know that if there is a government deficit today, the tax revenue in the future will increase because the government needs money to fill in the deficit by putting more tax on the tax payers. If the tax in the future will be higher, they will be deducted more of their income if their income level stays the same. Then they will have less money to spend after the taxation. Worried about the future, those rational tax payers will save more money today just in case they do not have enough for consumption in the future. With more savings, the private loanable funds level also increases. When we put this on a graph, the government spending increased the demand for loanable funds market, which shifted the demand curve to the right. Then private expectations about future tax rates increased the supply of loanable funds, shifting the supply curve to the right as well. When those two forces cancel each other out, the graph will give us a level of interest rate that is the same as before. With the same level of interest rate, the amount of total investment expenditure is still the same as before. In this case, even though savings from the public increased, due to other forces such as government spending, the overall effect on investment is for the investment level to stay at a constant level. Ricardo-Barro effect graphLast, but not least, I will analyze another theory proposed by the Keynesians. This theory called the paradox of thrift was first introduced by Keynes . This theory argues that when one person increases the savings, someone else will be worse off in the economy and their income must be decreased. This is probable because for example, when I decided to decrease my consumption in ice cream and decided to save that amount as savings, the man selling the ice cream will see a decrease in income because he will be selling less ice cream if I were a regular ice cream eater. Due to the decreased income of the second person, this second person must decrease his savings or consumption or both of them. On the graph, the initial increase in savings increases the supply curve and shifts it to the right. However, due to the decrease in savings from another person in the economy, the supply curve is soon shifted back to the left, signifying a decrease in savings. This process continues until it settles down to the original equilibrium position. The interest rate and quantity of loanable funds also stay at the initial equilibrium level. So the result of this initial increase in saving and decrease in consumption is still no change to the investment expenditure level at the end. Even though many economists have opposed this theory, I believe that this theory is reasonable due to the analysis I have said above. Paradox of Thrift graph

In conclusion, I believe that although intuitively and graphically savings will definitely increase investment, there are many other influential factors in a comprehensive economy. An economy is a place where many forces work and interact together to determine the final outcome and nobody can let an economy run well with only one or two factors. In reality, we seldom see the case when only a single factor determines the economic output and it is usually one factor change creating other factors to change subsequently just like the butterfly effect.